Atty. Marietta P. Turingan

March 27, 1995 Atty. Marietta P. Turingan Atlas Fertilizer Corporation 2nd Flr. Pioneer House, 108 Paseo de Roxas St. Legaspi Village, Makati, Metro Manila Madam: This refers to your letter of March 17, 1995 requesting opinion on whether the following corporate transactions are legally feasible: 1. Distribution of capital surplus or additional paid-in capital as property dividend. 2. Use of capital surplus or additional paid-in capital to acquire shares of stocks of existing stockholders as treasury stocks. 3. Use of capital surplus or additional paid-in capital to acquire treasury shares that would eventually be retired. The creation of capital surplus or additional paid-in capital via decrease of capital stock, either by a reduction in the par value per share and/or reduction in the number of shares authorized to be issued, may be allowed, provided however, that such decrease will not prejudice the rights of corporate creditors. However, as a general rule , the capital surplus or paid-in surplus resulting therefrom cannot be declared as dividends. Section 43 of the Corporation Code is clear that dividends can only be declared and paid out of the unrestricted retained earnings. As an exception, however, the Commission previously ruled allowing the same to be declared as stock dividends ,taking into consideration that it would not result to capital impairment inasmuch as when a corporation converts the surplus into capital by issuing to its stockholders shares of stock representing their respective participation, it actually parts with nothing but merely transfers the surplus to capital account and issues shares of stock to represent the same. (SEC Executive Meeting of October 17, 1989 Re: Keppel Philippines Shipyards, Inc.) Transaction No. 1 is, therefore, not feasible. The capital surplus or additional paid-in capital can only be declared as stock dividends, but not as cash or property dividends. Regarding the second transaction, the same shall not be allowed in the absence of unrestricted retained earnings. The acquisition by the corporation of its own shares is subject to Section 41 of the Corporation Code which provides: "SECTION 41. Power to acquire own shares . A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes including but not limited to the following cases: Provided, that the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired. 1. To eliminate fractional shares arising out of stock dividends. 2. To collect or compromise an indebtedness to the corporation arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provision of this Code." (Emphasis supplied) The above provision authorizes a corporation to purchase or acquire its own out of unrestricted retained earnings for a legitimate corporate purpose or purposes. The underlying reason for limiting share purchases springs from the necessity of imposing safeguards against the depletion by a corporation of its assets and the impairment of its capital needed for the protection of creditors. This is sometimes expressed in terms of "trust fund doctrine." The right of a corporation to re-acquire or purchase its own stock is always subject to the condition that the purchase shall be made in good faith and without prejudice to the rights of other stockholders or creditors. It is unauthorized and invalid if made for the purpose of defrauding or injuring other stockholders or creditors of the corporation, or if it does in fact defraud or prejudice creditors, though made in the most perfect good faith. (Fletcher Cyclopedia Corporations, Vol. 6 A Ch 33 Sec. 2854) Thus, the Commission previously ruled that a corporation may re-acquire or purchase its own stock provided that the following conditions are complied with: a.) Its capital is not thereby impaired; b.) A legitimate and proper corporate objective is advanced; c.) The condition of corporate affairs warrants it: d.) The transaction is designed and carried out in good faith; e.) There is intended and there results no undue advantage to a few favored stockholders at the expense of the remainder; f.) The rights of creditors are not jeopardized. g.) T here must be unrestricted retained earnings to acquire the same (SEC Opinions dated December 15, 1982, September 11, 1985 and October 12, 1992) Transaction No. 3 would actually result to decrease of capital stock, and therefore, subject to the requirements under Section 38 of the Corporation Code. Except by decrease of capital stock and as otherwise allowed by the Corporation Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. cdll Very truly yours, (SGD.) FE ELOISA C. GLORIA Associate Commissioner